Cartel criminalisation risks competition: Productivity Commission

Legislation criminalising cartel behaviour carries sufficient risk of harming collaborations that could improve competition to mean it should be reviewed within two to four years of implementation and data collection should start now to allow comparisons to be made of its impact, says the Productivity Commission.

Issuing its final report on competition in services industries, the commission also firms up its recommendation for a full review of the key provisions of the Commerce Act governing anti-competitive behaviour, especially as advances in information technology in coming years "will likely feature large economies of scale and network effects and thereby raise competition issues."

Commenting on the Commerce (Cartels and Other Amendments) Bill, the commission is critical of the government for allowing it to "languish" on the parliamentary Order Paper, saying it is "unaware of any policy rationale for this delay", which it is concerned is already creating a chilling effect on firms who may wish to collaborate but are fearful of falling foul of the proposed new law.

Smaller firms, in particular, appeared reluctant to enter into collaborations where they feared possible breaches, "presumably because they lack the legal expertise to confidently navigate competition law."

Despite provisions designed to permit collaborations, "perceptions remain that criminalising certain activities will have a dampening effect on pro-competitive business activities."

A full review of the amendment's impacts on business decision-making should be undertaken between two and four years' after its enactment, and "data collection needs to begin prior to the policy's implementation, not when the evaluation takes place two years later."

Many of the concerns raised in the commission's report,about poor productivity improvements in New Zealand service industries stem from the combined effects of a small market in which many small firms struggle for profitable scale, and the tendency in small markets for a few, dominant players to emerge.

While a few large competitors doesn't necessarily produce poor outcomes for consumers, the report discusses at length how to create a better balance in the existing competition law, the Commerce Act, than the current "counter-factual" test enshrined in Section 36. The Commerce Commission has also called for a review of the test.

Unlike many other countries, New Zealand is unusual for using just this test, based on a hypothetical judgement about what a firm would have done if there hadn't been a competitor to start with.

The test "causes problems because it focuses on the actions of firms in the hypothetical counterfactual world where a firm lacks substantial market power rather than on market outcomes," it said.

"Actions are not only harder to pin down, they are also unreliable proxies for market outcomes. While the current approach may deliver a desirable degree of certainty, it does so only by effectively setting a very high threshold for what counts as a transgression," the commission says. "The price paid for this certainty is the risk of damage to dynamic efficiency from a too-lenient test that allows dominant firms to indulge in and behave in exclusionary ways."